Real Estate Executives Urge Caution As Values Continue To Rise

Investment managers need to traverse the real estate landscape with great caution as the cycle confronts its final throes and values continue to climb, according to panelists participating in a breakout session at last month’s RG + Associates ConsortiumEAST event.

New York, NY  (July 2017) –

Investment managers need to traverse the real estate landscape with great caution as the cycle confronts its final throes and values continue to climb, according to panelists participating in a breakout session at last month’s RG + Associates ConsortiumEAST event.

“I would say we are in the 8th year of the business cycle—and I firmly believe that real estate is overpriced in many, many markets,” said Basis Investment Group President Tammy Jones.

Jones noted that values in many of the gateway cities are 40% higher than the peak values of 2007, and while there are still some opportunities in the middle market, cap rates in many markets are at all-time lows and interest rates and cost of capital are rising.

“We have headwinds on rent growth, and although the fundamentals have not fallen off a cliff, values can’t really go much higher, so you have to be cautious in your investing and in your underwriting,” she warned.

Ishika Bansal, v.p. with real estate consulting firm Townsend Group, reiterated Jones’ words of caution, noting that her firm has taken pains to avoid taking on too much risk at this point in time, expanding into new sectors in order to diversify and protect its clients if and when the cycle turns.

“We focus on investments where we can get downside protection. We ask ourselves where we can be in the capital stack, where we can protect our capital, where we’re not taking too much risk. By default, some of those strategies are core-plus and value sectors like retail or industrial,” she said.

“At this time in the market cycle, those sectors are looking less attractive,” she added, noting that it makes it especially important to find managers that can access them in a “differentiated way.”

“We have made investments where we have been able to pick high-quality managers that are able to invest in those sectors but avoid the mistakes that we’ve made in the past,” she said.

Jones went on to add that, while the future is not all ‘doom and gloom’ for managers looking to navigate the real estate markets, she believes the time is now for firms to remain vigilant in protecting capital.

“Do I think that we’re falling off of a cliff? I want to be clear I am not saying that. Do I think that values are likely to decline some between now and the next couple of years? I do,” Jones said. “So I think that you have to make really, really careful bets as an equity and debt player given the uncertainty in today’s market. It takes experience and investing through multiple cycles. It also takes marrying the right capital markets approach with the performance of the underlying real asset and the right basis because those are going to protect you in the end.”

Emerging Manager Monthly, July 2017

July 9, 2017